Deck 17: Price Setting in the Business World

Question 1

Average-cost pricing consists of adding a 20 percent markup to the average cost of an item.

Answer 1

False
Explanation: Average-cost pricing means adding a reasonable markup to the average cost of a product.

Question 2

A certain item has a production cost of $24. The manufacturer takes a 25 percent markup, the wholesaler takes a 20 percent markup, and the retailer takes a 50 percent markup. Therefore, the item has a retail selling price of $80.

Answer 2

True
Explanation: A markup chain is the sequence of markups firms use at different levels in a channel and determines the price structure in the whole channel. The markup is figured on the selling price at each level of the channel.

Question 3

High markups always mean big profits.

Answer 3

False
Explanation: High markups don't always mean big profits.

Question 4

The stockturn rate is the number of times the average inventory must turnover to make a profit in a given year.

Question 5

A "markup chain" can be used to calculate the price structure in a whole channel.

Question 6

Firms with high markups and low turnover rates may earn lower profits than firms with low markups and high turnover rates.

Question 7

Retailers who earn high profits generally use higher markups than retailers who have low profits.

Question 8

Items with lower markups may be more profitable--if the stockturn is higher.

Question 9

A markup is the dollar amount added to the cost of products to get the selling price.

Question 10

If a retailer adds a 25-cent markup to a product which costs the retailer $1.00, then according to the text the retailer's markup is 20 percent.

Question 11

Average-cost pricing guarantees that the firm will earn enough to at least cover its costs.

Question 12

Most retailers and wholesalers set prices by using a different markup percent for each different product carried.

Question 13

A major problem with average-cost pricing is that it does not allow for cost variations at different levels of output.

Question 14

Cost-oriented approaches are the most common price setting approach.

Question 15

By definition, a markup of $1 on a cost of $2 translates to a markup of 40 percent.

Question 16

A low stockturn decreases inventory carrying cost and frees up working capital.

Question 17

If a retailer adds a 25-cent markup to a product which costs the retailer $1.00, then according to the text the retailer's markup is 25 percent.

Question 18

According to the text, markup (percent) means percentage of cost unless otherwise stated.

Question 19

A supermarket is bound to expect a higher stockturn for fresh fruits and vegetables compared to soaps and detergents.

Question 20

Average-cost pricing means adding a reasonable markup to the total cost of a product.

Question 21

The break-even point is the intersection of the total cost curve and the total profit curve.

Question 22

Average-cost pricing works well if the firm actually sells the quantity which was used in setting the price, but losses may result if actual sales are much higher than were expected--due to higher total variable costs.

Question 23

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Question 24

Ignoring demand is the major weakness of average-cost pricing.

Question 25

A firm's average fixed cost increases as its output increases.

Question 26

A firm's total cost increases only when its variable cost increases.

Question 27

Even if a firm's average variable cost remains constant per unit, its average cost will increase as output increases.

Question 28

Break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

Question 29

If a manager sells more than was expected when average-cost pricing was used to set a price, the firm will lose money.

Question 30

Average-cost pricing works best in situations where demand conditions do not change a lot.

Question 31

When setting prices, the marketing manager should consider the firm's demand curve, or else the price may not even cover the firm's total cost.

Question 32

A major advantage of average-cost pricing is that it assumes costs remain constant at different levels of output.

Question 33

Average fixed costs are lower when a large quantity is produced.

Question 34

Total fixed costs do not change when output increases.

Question 35

At zero output, total variable cost is zero.

Question 36

If the price per unit is $1.00 and the average variable cost per unit is 60 cents, the fixed cost contribution per unit is $1.40.

Question 37

An advantage of average-cost pricing is that it considers competitors' costs and prices.

Question 38

Average fixed cost goes down as output decreases.

Question 39

As output increases, a firm's average fixed cost probably will go down.

Question 40

If a firm's average variable cost is constant per unit, then the firm's average cost decreases continually as output increases because average fixed cost decreases continually.

Question 41

Online auctions (on the Internet) are becoming very popular as a way to determine how much customers are willing to pay for a product.

Question 42

When customers have substitute ways of meeting a need, they are likely to be more price sensitive.

Question 43

All customers have the same reference price for the same basic type of purchase.

Question 44

The sole objective of leader pricing is to sell large quantities of the leader items.

Question 45

Value in use pricing considers what a customer will save by buying a product.

Question 46

Even if a manager's estimate of a demand curve is not exact, there is usually a profitable range around the price that would maximize profit.

Question 47

Business customers are sometimes less price sensitive if there are switching costs.

Question 48

When customers have to pay the bill themselves, they are likely to be more price sensitive.

Question 49

Marketing managers wish they knew more about price sensitivity, but so far marketing research has been of little help in identifying factors that influence customers.

Question 50

Each possible price has its own break-even point.

Question 51

Sequential price reductions and clearance sales are the same thing.

Question 52

Marginal analysis focuses on the changes in average fixed cost per unit and average variable cost from selling one more unit to find the most profitable price and quantity.

Question 53

There is only one price that will be profitable for firms with down-sloping demand curves.

Question 54

When the end benefit of a purchase is significant to the customer, he is likely to be less price sensitive.

Question 55

The greater the total expenditure, the less price sensitive customers are.

Question 56

Auctions have not proved very effective in determining how much potential customers will (or will not) pay for a product.

Question 57

A firm using sequential price reductions starts with a high price but plans to reduce that price step-by-step until its product is sold out.

Question 58

The price most consumers expect to pay for a product is called the leader price.

Question 59

If a company raises its price per unit, but keeps total fixed cost and variable cost per unit the same, the break-even point will be lower.

Question 60

Break-even analysis is particularly accurate because it recognizes that the demand curve is downward sloping.

Question 61

Demand-backward pricing is commonly used by producers of consumer products, especially shopping products such as women's clothing and appliances.

Question 62

Demand estimates are required for demand-backward pricing to be successful.

Question 63

"Full-line pricing" is setting prices for a whole line of products.

Question 64

Product-bundle pricing may encourage customers to spend more and buy products that they would not buy otherwise.

Question 65

With complementary product pricing, different price levels are set on different products because the products are targeted at different market segments.

Question 66

A major difference between leader pricing and bait pricing is that bait pricing is criticized as unethical while leader pricing is not.

Question 67

Price lining tends to result in faster turnover, fewer markdowns, quicker sales, and simplified buying.

Question 68

If Radio Shack offers several models of clock radios at each $5 increment between $19.95 and $49.95, it is probably practicing odd-even pricing.

Question 69

It makes sense for a manager to use leader pricing on a product only if consumers are unlikely to be aware of the normal price.

Question 70

Leader pricing is typically used with well-known, widely used items which are not stocked heavily by consumers.

Question 71

"Demand-backward pricing" involves a producer estimating an acceptable final consumer price and working backward to determine what the producer can charge in the channel.

Question 72

The Federal Trade Commission encourages bait pricing because it reduces the prices that consumers pay for products.

Question 73

Bid pricing is offering a specific price for each possible job, rather than setting a price that applies to all potential customers.

Question 74

Prestige pricing involves setting a rather high price because the product has a normal down-sloping demand curve.

Question 75

Leader pricing is normally used with products for which consumers do have a specific reference price.

Question 76

"Psychological pricing" involves setting prices which end in certain numbers, while "odd-even pricing" is setting prices which have special appeal to target customers.

Question 77

Prestige pricing is most common for luxury products such as furs, jewelry, and perfume.

Question 78

The major disadvantage of price lining is that it is complicated for both clerks and customers.

Question 79

Competition needs to be considered when adding in overhead and profit for a bid price.

Question 80

With bid pricing, it is best for the bidder to use the same overhead and profit rates on all jobs since that will make it easy to estimate costs and eventually will increase profits.